At the Pumps: High Prices and Low Motives

With gas prices so high, everybody knows, just knows, that the greedy bastards who run Big Oil have their environmental raping machines on fast forward, rampaging over a defenseless Mother Earth and spewing out pollution 24/7.

Motives are equally low in Washington. Candidates there are preoccupied with the election. They see surging pump prices, and their knees jerk into the gotta-do-sumthin' mode. When he was angling for a second term back in 1996, Bill Clinton, the master of the caring gesture, scored on the evening news by opening up the U.S. Strategic Petroleum Reserve. Oil experts laughed. They said the withdrawal rate was too small to affect prices. But gestures count in politics.

So no one was much surprised in April when candidate George W.'s Environmental Protection Agency said that it was looking into a temporary relaxation of a certain pollution regulation. Not a big deal, really; maybe it would knock a nickel off every gallon according to one account. The idea was to loosen up the supply side by slowing down the gradually tightening restriction on the amount of sulfur allowed in gasoline, thereby keeping certain low-tech refineries producing.

But it didn't happen. Guess who lobbied hard against it?

Those greedy bastards who run Big Oil, that's who.

As usual, what everybody knows, just knows, about gasoline and prices is wrong. Big Oil says it can produce any kind of gasoline we want and do it at reasonable prices if we don't keep fiddling with regulations. It needs to plan its refinery investments and get the appropriate return at the expected time. In other words, it wants orderly business.

Politicians don't want orderly business. Each one of them wants special gestures to please the locals back home. So we have "boutique fuels." Atlanta, Georgia, must have a different gasoline from what must be served just 148 miles away in Birmingham, Alabama. Greater Detroit must have a different gas from the rest of Michigan. California is famously different from all the states around it. Not so famously, the same is true of Minnesota. And New England is a patchwork of special formulas.

Here's how complex the supply chain has become. The Colonial Pipeline Company pushes 147 different fuels through its network (including diesel and jet fuel), and 93 of them have to be completely segregated. This is tricky, and such precise handling doesn't come cheap.

The situation is getting worse as states (California, Connecticut, and New York, for example) and localities decide they don't want the fuel additive MTBE. The other choice is ethanol. But it can't be shipped in pipelines because it picks up water. There's always water in pipelines, Citgo's Don Honeyman told me, but petroleum products including gasoline float on top of the water and they don't mix. Ethanol, on the other hand, even when mixed into gasoline in small concentrations, absorbs water. So the ethanol has to go by rail or trucks to the local terminals where it's added to gasoline just in time for distribution. This greatly complicates gasoline handling—read "adds cost."

Actually, any ethanol in gasoline is a terrible idea, justified only by politics. Back in the carburetor days, there was an argument—dubious then, silly now—for adding an oxygen component to gasoline as a one-size-fits-all way to trick badly maintained cars into lower exhaust emissions. But fuel injection can't be tricked, and the carburetor has been gone for 15 years, leaving us with a naked subsidy for farmers.

It's an expensive subsidy, too, because adding ethanol to gasoline raises the mix's RVP (propensity to evaporate), which creates more air pollution. To avoid that, a special, extra-low RVP gasoline has to be used for any mix that will subsequently get ethanol. It's known as RBOB in the trade, and CARBOB is the version used for California gas. RBOB and CARBOB cost more than the usual gasoline. Ethanol costs more, too. And mixing them gives you a high-price fuel producing lower gas mileage than straight gasoline. Only politicians can see merits here.

Obviously, we're confronting refinery and handling costs we've never faced before. Add those onto crude oil prices that are roughly double those of 10 years ago. Logically, pump prices must be higher than ever.

Surprisingly, they aren't. The average price of regular across the U.S. is $1.81 per gallon as I write this in April. That's up 24 cents in a year, and it sounds brutal if I allow myself to remember the gas-war prices in the 1960s, when I filled my Corvette for less than 20 cents per gallon and did so week after week. Of course, a first-class stamp then was only five cents.

In fact, if you look at "real" price in constant dollars, $1.81 is a sweet deal compared with what we paid in the good old days. Moreover, we've been enjoying record low prices since 1985. If you go back through the past 85 years—which is nearly the complete history of gasoline marketing—you'll see a peak in 1980-81. That was the second OPEC oil crunch. Real prices in that period averaged about $2.88 per gallon.

You have to go all the way back to 1922 to exceed that level on a yearly average. My source for all of this is the Energy Information Administration of the U.S. government, unless I note otherwise.

Generally, gas prices have been declining since 1922, with a hump during the Great Depression that continued through World War II. I remember with great agony the gas lines of 1974-75. In New York City, where I lived, hours went by waiting for the car ahead to move. Now as I look back at constant-dollar figures, I see that the "crisis" of those days raised prices only a little above the trend, from about $1.62 in 1973 to nearly two dollars during the crunch. The "before" price in real dollars was about the same as it was at the beginning of this year.

In other words, today's shockingly high prices are neither high nor shocking. That conclusion is supported by another statistic: Consumer spending on gasoline last year was only two percent of the gross domestic product, compared with 2.5 percent in 1990 and 4.4 percent in Gas Crunch II, 1981 (source: Lundberg Letter). Yes, higher prices this year will raise it some, but the GDP will be higher, too, thanks to a growing economy.

There's been much speculation lately about pain at the pumps. How close are we to the day when Mrs. America parks her SUV and opts for a hybrid something? When will we give up on big V-8s in everything? When will big pickups be too fuelish for everyday wear?

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*AccuPayment estimates payments under various scenarios for budgeting and informational purposes only. AccuPayment does not state credit or lease terms that are available from a creditor or lessor, and AccuPayment is not an offer or promotion of a credit or lease transaction.